2023-06-07 19:30:34 ET
Summary
- Yext, Inc. reported a solid FQ1, with adjusted profits sailing past analyst estimates and reaching record numbers.
- The answers company guided to revenues returning to growth in the year ahead.
- The stock trades at only 4x sales forecasts, while Yext plans for an AI market poised for fast growth.
The Q1 FY2024 quarterly results of Yext, Inc. ( YEXT ) and the ensuing rally are prime examples of what happens to a stock for investors waiting on a turnaround. By the time the company actually reports a revenue turnaround in the coming quarter, the stock has already more than tripled off the lows. My investment thesis remains ultra Bullish on Yext, with the enterprise answers company still cheap at only $13.
Source: Finviz
2 Big Steps
Yext, Inc. made a couple big steps forward during FQ1'24 . The content management company has spent the last year shifting towards profitable operations, and the quarterly results were very impressive on this front.
The company only reported a 1% revenue growth in the quarter, but Yext produced a dramatic profits boost for the seasonally weak April. In the last year, the company went from large losses and small adjusted EBITDA losses to sizable profits and record adjusted EBITDA totals.
Yext made a huge cut to operating expenses while keeping revenues relatively flat, leading to the huge profits shift. Non-GAAP operating expenses fell nearly $14 million YoY to just $69 million from $83 million last FQ1.
The end result was an adjusted profit of $10.6 million and a very impressive adjusted EBITDA of $14.4 million, or 14.5% of revenues. Yext produced a massive $17.4 million boost to EBITDA profits in the year.
Also worth pointing out, Yext produced $1.5 million in interest income that is excluded from adjusted EBITDA totals. The only amount materially separating adjusted EBITDA from adjusted profits is the $4.7 million utilized for depreciation costs.
The other big step was FQ2 guidance suggesting the company now has the desired sales efficiency levels and is ready to re-enter the growth phase. The company guided to revenue of $102.0 million, at the midpoint, with the prior record revenue level at $101.9 million in FQ4'23.
In addition, management guided to full year revenue of $405.5 million, at the midpoint, suggesting 2H revenues of $204.0 million or $102.0 million on a quarterly basis. The company had previously guided to FY24 revenues of $402.0 to $406.0 million in a positive indication of the slow return to growth at a much higher profitable level.
Yext consistently beats quarterly revenue targets by $1+ million, so one should expect a revenue beat and guide up to record revenue levels when the company reports FQ2'24 numbers in ~3 months. In addition, Yext AI chat could become a growth driver as the year moves on.
Still Solid Value
Yext had gotten so cheap that the current rally from a low last year at $4 to nearly $14 now just places the stock at a more normal valuation. Yext now only trades at 4x forward sales targets after the 30%+ rally following strong FQ1 numbers, while the business is highly profitable.
The stock is so cheap, Yext was able to repurchase 600K shares for $4.6 million and the company still boosted the cash balance to $217 million. The company generated $26.7 million in operating cash flows during the quarter and Yext doesn't have a lot of demands for capex, allowing most of the operating cash flows to flow into the bank account.
At $13, Yext isn't so cheap as to make buybacks exceptional bargains now. Either way, though, the company can either repurchase shares at a solid value or build up the cash balance for a rainy day.
The company didn't aggressively promote a return to double-digit sales growth in the years ahead, but the management team chose to place a slide in the presentation pointing to a market with 22% CAGR. IDC forecasts the total addressable market, or TAM, where Yext plays in the content management and AI software segment to nearly double in size from $32 billion in 2023 to $61 billion in 2026.
At double-digit growth, Yext will see FY24 revenue targets of $400+ million turn into $500 million by FY25. This number would still be below the target market growth rates, highlighting some of the potential for management to boost revenue targets as the company starts building the deal pipeline and adding sales reps after a year of focusing on improving efficiency.
The obvious risk here is that Yext fails to return to growth and the stock falls back to previous lows. Investors could see a substantial downside from the current levels.
Takeaway
The key investor takeaway is that Yext, Inc. remains a cheap software stock despite the big rally off the lows. YEXT stock still isn't priced for the company returning to growth in the year ahead at just 4x conservative revenue targets.
For further details see:
Yext: Turning The Corner